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Shariah scholars should be more vigilant when things go wrong in sukuk.Shariah scholars should be more vigilant when things go wrong in sukuk.

Recently, the Abu-Dhabi listed Dana Gas argued that it would not make payments on $700 million of its sukuk maturing in October 2017. This decision was justified by the company on the basis that this mudharabah-based instrument is no longer Shariah compliant due to changes in Shariah interpretation which has made the sukuk unlawful in the UAE. Since this case is currently being fought in both UK and UAE courts, it will take some time for the outcome of this case to be known. However, the situation has attracted a lot of debate in the Islamic finance and perhaps rightly so. It is time for the industry players to ponder over the claims of transparency, fairness, and justice (as embodied in the avoidance of gharar in Islamic finance) which are considered to be the prominent features of Islamic finance.

If we look at the prospectus of this sukuk which was issued in 2013, we can find that the question of which court shall have a say in the case of disputes is somewhat contradictory. For instance, this prospectus on the one hand states that “The Certificates are governed by English law and the Trustee has submitted to the non-exclusive jurisdiction of the courts of England to settle any disputes relating to the Certificates” But it is mentioned a few lines later that “Investors may have difficulties in enforcing any English court judgments or arbitral awards against Dana Gas in the courts of Sharjah. In addition, even if English law is accepted as the governing law, this will only be applied to the extent that it is compatible with Sharjah law and public policy.” Thus, contrary to Islamic commercial and transaction law which is very explicit on the fact that all the terms and conditions of a contract should be clearly and unambiguously spelt out and any clause, conditions, sentence, and/or part of the contract that may lead to dispute between the contracting parties should be avoided at all cost, there seems to be grave legal uncertainty in this case with respect to the governing law.

There is another important, but least talked about, aspect of this case; the role and duty that Shariah advisors approving such instruments should be playing in such situation. While Dana has simply declared that the sukuk is no longer Shariah-compliant, one is simply unable to digest questions that arise under this simplistic stance: who were the Shariah scholars involved in this transaction? What exactly is the change in interpretation that made the sukuk invalid? When did this change take place? Can such changes in interpretation (even if they happen) be retrospective to nullify the transaction?

The above questions need to be answered since it is not the first time when Shariah has potentially been misused in Islamic finance. Recall the famous case of the Investment Dar (TID) whereby TID appealed in the English court to consider the transaction void because it was not allowed under Shariah. Similarly, it was argued in the U.S court in the case of East Cameron Gas sukuk that the sukuk-holders were not the real owners of the musharakah-assets. In both cases, the courts rejected the arguments of the sukuk originators but this is not our concern here. The question is: what role the Shariah scholars could and should have played in these transactions? What role did they play in the protection of sukuk holders? Does being on the pay role of sukuk originator simply mean that Shariah scholars endorse each step by the sukuk originators even if it be at the stake of sukuk-holders and the sublime principles of Shariah?

It is no wonder that such instances usually result in criticism against the current Shariah governance structure in Islamic finance where conflict of interest prevails. Therefore, such instances should compel the concerned circles in Islamic finance to look for remedial measures. It is right time for the stakeholders of Islamic finance to address such crucial questions before the industry faces a major blow due to practices which are far from the ethical aspect of Islamic finance principles.

The author holds Ph.D. from INCEIF Malaysia and currently serving as Head of the Shariah Advisory Board at Amanah Institute of Islamic Finance and Economics.